Going About Organizing a Partnership

Organizing a Partnership

P1 Prepare entries for partnership formation.

When partners invest in a partnership, their capital accounts are credited for the invested amounts. Partners can invest both assets and liabilities. Each partner’s investment is recorded at an agreed-on value, normally the market values of the contributed assets and liabilities at the date of contribution. To illustrate, Kayla Zayn and Hector Perez organize a partnership on January 11 called BOARDS that offers year-round facilities for skateboarding and snowboarding. Zayn’s initial net investment in BOARDS is $30,000, made up of cash ($7,000), boarding facilities ($33,000), and a note payable reflecting a bank loan for the new business ($10,000). Perez’s initial investment is cash of $10,000. These amounts are the values agreed on by both partners. The entries to record these investments follow.








In accounting for a partnership, the following additional relations hold true: (1) Partners’ withdrawals are debited to their own separate withdrawals accounts. (2) Partners’ capital accounts are credited (or debited) for their shares of net income (or net loss) when closing the accounts at the end of a period. (3) Each partner’s withdrawals account is closed to that partner’s capital account. Separate capital and withdrawals accounts are kept for each partner.

Point: Both equity and cash are reduced when a partner withdraws cash from a partnership.

Decision Insight
Broadway Partners Big River Productions is a partnership that owns the rights to the play Big River. The play is performed on tour and periodically on Broadway. For a recent year-end, its Partners’ Capital was approximately $300,000, and it was distributed in its entirety to the partners. ▪